Product Market Integration, Rents and Wage Inequality
27 Pages Posted: 11 Apr 2010
Date Written: April 9, 2010
Globalization in the form of product market integration affects labour markets and produces winners and losers. While there are aggregate gains, it is in general ambiguous how inequality is affected. We explore this issue in a Ricardian model and show that it depends on the balance between "protection" and "specialization" rents. In particular, wage inequality among similar workers (residual wage inequality) may be U-shaped, at first decreasing and then increasing in the process of product market integration. Consequently, there may be gains in both the efficiency and the equity dimension until integration reaches a certain level at which a trade-off arises.
Keywords: Trade frictions, relative productivity, rent sharing, job turnover and inequality
JEL Classification: F15, F16, J39, J5, J63
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